Posted by: Kristian Harris
The client had secured a 5 year fixed rate mortgage in 2012 at a rate of 5.08%, a 1.44% ‘discount’ off of the 6.5% Posted Rate on the BMO website. MonsterMortgage.ca has covered the topic of Posted Rates before and how they’re used to inflate penalties and fees; however, this case is different – the client was told one number, and presented another come payoff time.
Attached is a scan of the client’s actual payout statement. When the bank was first contacted in regards to breaking the mortgage in question, the client was quoted a penalty in and around the $20,000 range. Not a particularly pleasing scenario; however, a penalty far lower than what is indicated in the sheet below.
There a few reasons for the discrepancy between the original quoted penalty, and the actual penalty on the payout statement:
1) The ‘Posted’ Interest Rate and the ‘Discount’ off that Rate
You don’t pay the MSRP on a brand new car, nor should you expect to pay the ‘Posted’ rate on a mortgage. While the bank will offer you a discount off of that posted mortgage rate, bringing your actual rate closer to what is available in the market, that same discount is incorporated into the penalty through the Interest Rate Differential (IRD) calculation. The way banks calculate IRD on penalties has been a much maligned topic. Lawsuits surrounding the way big banks calculate their penalties have previously been brought forth, sighting ‘vague’ and ‘inappropriate’ calculations..
2) Often times, not even the bank’s employees can calculate your penalty
The penalty calculator for BMO is available online. However, without knowing the valuable ‘Discount’ you received at the time of your mortgage, the calculations are meaningless. Take a look at the calculator and type in your own mortgage amount. Calculations will differ wildly. Unfortunately, the number an employee tells you at the branch level holds no weight when compared to the payout statement. Even when there is a difference of $20,000.
What are your options?
Look out for a mortgage lender who does not use ‘Posted’ rates. Often times, clients give no thought to posted rates when signing up for a mortgage – after all, there are a number of other things to worry about when purchasing a new home or planning a refinance. In this case however; those oft-ignored posted rates ended up costing our client over $20,000.00 – a number that’s quite difficult to ignore.